What Constitutes Reliable Cost-of-Living Data? Five Components That Matter

by Marillyn Tefft, Senior Researcher 6. September 2012 13:43

Workforce mobility has moved from a transaction role to a strategic role in the overall development and management of talent. Creating attractive mobility packages for key employees now depends more than ever on justifiable cost-of-living data based on several underlying components.

1. Expenditure patterns matter.

The percentage of earnings spent on goods and services, housing, transportation, health services, and tax obligations are crucial to reliable cost-of-living data. These expenditure patterns depend on earnings (annual salary), housing size, whether one rents or owns the home, home amenities, and the location of housing (downtown, close-in suburb, rural, etc.). The number of people in the family, as well as the education level of the employee in question, should also be taken into account.

2. Local housing data matter.

From where and how housing data are collected are important. Using Metropolitan Standardized Area (MSA) or city-wide home or rental price only gives an average of all square footage sizes/home amenities. Frequently, metrics such as the average or median include single, multi-family, new and existing homes — not data for the specific cost of a particular size or type of housing.  Home prices can also vary significantly in specific parts of the city, even down to the neighborhood level. 

3. Consistent data on goods and services matter.

A consistent price comparison index must be developed and implemented to survey price differences among goods and services across locations. For example, assume ground beef is used as the proxy to compare meat prices. To produce a valid comparison, the same amount and quality for one pound of ground beef must be collected during the same time period in every location. This is a costly and resource-intensive endeavor. Cost-of-living differences for goods and services determined from data collected as input from visitors to a website are highly suspect as to validity and timing. Data must be collected with a systematic methodology in order to be comparable.

4. Tax obligations matter.

Federal, state, and local taxes are mandatory and should be considered prior to examining goods and services, health, and transportation expenditures. Mortgage interest deductions, family size, and property tax deductions impact tax obligations and should be incorporated. Tax obligations lower total amounts available for other expenditures.

5. Consistency, comparability, and timeliness of data matter.

Is the methodology described? How often is the data updated? Are the same sources used consistently? Reliable cost-of-living data are updated regularly using consistent sources with sound methodologies. Aged data invalidates cost-of-living differentials.

For justifiable cost-of-living data, use ERI's Relocation Assessor® & COL Survey, a desktop software application that compares cost-of-living levels in over 10,000 areas. HR professionals and consultants utilize this software to calculate relocation bonuses (or salary adjustments) for transferred employees.